Explanation:
To effectively mitigate liquidity risk and the potential for a run by short-term creditors, a bank should deploy a combination of strategies. This includes holding a liquid asset buffer (cash and highly liquid securities) to meet immediate cash outflows, establishing emergency lines of credit for contingent funding, and proactively managing its liability maturities to avoid large refinancing cliffs (concentrations of maturing debt) within short timeframes. Therefore, all of the listed steps are appropriate mitigation measures.
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Q.60 Capital Bank, based in Ireland, is a dealer bank. The bank has several revenue-generating segments, including investment banking, deposit taking, and corporate lending. The CRO is wary of liquidity problems that could be triggered by a run arising from unprecedented poor performance or some other external shock. Which of the following steps could the bank take to mitigate the risk of loss of liquidity from a run by short-term creditors?
A
Setting up a buffer stock of cash or securities
B
Establishing emergency lines of credit
C
Streamlining the maturities of its liabilities to cap the maximum number of liabilities that must be settled with a given period of time.
D
All of the above
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